The SECURE 2.0 Act, signed into law on December 29, 2022, built on the foundational changes to retirement plans enacted in the Setting Every Community Up for Retirement Enhancement Act (SECURE) in December of 2019, made a few significant changes to the rules governing the administration of and contributions to retirement plans.

Initially planned to be effective beginning January 1, 2025 or later, the IRS has postponed some of these changes’ effective date until January 1, 2026.

Some of the changes will be newly effective; whether in 2025 or 2026; these include:

401(k) Plans

As we noted in December of last year, the 2025 contribution limit for 401(k), 403(b), and most 457 plans will rise from $23,000 in 2024 to $23,500 for employees under 50. For those over 50, a catch-up contribution of up to $7,500 annually is permitted – no change from 2024 – allowing you to contribute up to $31,000, assuming your employer-sponsored retirement plan is structured to allow catch-up contributions.

In addition, starting this year, for employees between ages 60 and 63, an additional catch-up of the greater of $10,000 or 150% of the 2024 catch-up limit of $7,500, or $11,250. This bring the total contribution permitted for those ages 60, 61, 62, and 63 to $34,750, or the base contribution limit of $23,500 plus the maximum catch-up for those ages of $11,250.
A further change for 2025 is that, for 401(k) plans established on or after December 29, 2022, employees must be automatically enrolled in the plans. Initial automatic contribution levels must represent at least 3% of compensation, but not more than 10%, with a 1% increase annually until the contribution level reaches at least 10% but not more than 15%.

Employees are required to be automatically enrolled but are not required to participate or to contribute – they can change their contribution rate to 0% if they choose.

SIMPLE IRAs

For SIMPLE IRAs (Savings Incentive Match Plan for Employees) the 2025 maximum contribution will rise to $16,500, up from $16,000 for 2024. If you are over 50, a catch-up contribution of up to $3,500 – unchanged from 2024 – is permitted.

In addition, beginning in 2025, SIMPLE IRA account owners between the ages of 60 and 63 can make catch-up contributions of the greater of $5,000 or 150% of the over-50 catch-up, which would be $5,250. For 2025, those aged 60-63 can make total contributions of $21,750 ($16,500 basic contribution limit plus $5,250 catch up for those 60-63) to SIMPLE IRAs. Cost of living adjustments will be made to this catch-up limit starting in 2026.

10-Year Rule for Inherited IRAs to Become Effective in 2026

The SECURE Act of 2019 initially established a rule whereby inherited IRAs, unless inherited by certain “eligible designated beneficiaries,” must be fully paid out within 10 years of the original account owner’s death. Previously, beneficiaries of inherited IRAs could withdraw the account’s funds over their lifetimes.

However, the new 10-year payout rule created significant confusion, resulting in appeals to the IRS, which has not been rigorously enforcing this provision and, indeed, has been forgiving some penalties for not withdrawing inherited IRA funds.

But this can has almost reached the end of the road. Inheriting owners of IRAs must begin taking their required minimum distributions by December 31, 2026 and, if they do not, a penalty of 25% of the RMD not taken will be imposed.

Eligible designated beneficiaries, who need not take distribution of inherited IRAs within 10 years are:

• The deceased account owner’s spouse.
• A disabled beneficiary.
• A chronically ill beneficiary.
• A beneficiary not more than 10 years younger than the deceased account owner.
• A minor beneficiary who is the child of the deceased account owner. The 10-year rule will become effective when such a beneficiary reaches majority.

Final Thoughts:

The changes impacting RMDs on inherited IRAs are postponed until January of 2026, though taxpayers are exhorted to “apply a reasonable, good-faith interpretation of the statutory provisions underlying the amendments.”

However, the special catch-up contribution allowance for those between ages 60 and 63 is effective for 2025., as is the requirement that all eligible employees be automatically enrolled into an employer’s 401(k) plan, if that plan commenced on or after December 29, 2022.

While the IRS will be penalizing those beneficiaries of inherited IRAs for not taking required minimum distributions from these accounts starting in 2026, confusion on this issue has yet to be entirely dispelled.

If you have any questions about an inherited IRA, or about leveraging these new contribution limits to maximize your retirement assets, reduce your tax liabilities, and plan for a secure and happy retirement, our vCFOs / financial planners are always here to help.

Please click here to email us directly – let us help you navigate the new changes – that’s what we are here to do!.

Until next time –

Peace,

Eric

For more on the SECURE and SECURE 2.0 acts, see:

SECURE 2.0 Enacted – Key Highlights

Payout Rules for Beneficiaries of Inherited IRAsHow the SECURE Act Changed Retirement Plans

The SECURE Act of 2019